Australian Dollar holds ground due to risk-on market sentiment, China’s measures

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• The Australian Dollar receives support from improved market sentiment and strong commodity prices.

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• The AUD gained ground from robust trade data from China and Beijing's initiatives to stabilize the Yuan.

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• The US Dollar depreciated following the disappointing December US Producer Price Index data.

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The Australian Dollar (AUD) holds steady on Wednesday after two consecutive days of gains against the US Dollar (USD). The AUD/USD pair benefited from risk-on market sentiment, supported by strong trade data from China, Beijing’s efforts to stabilize the Yuan, and rising commodity prices. Traders are awaiting Australian employment data, scheduled for release later this week, for further insights into the Reserve Bank of Australia's (RBA) policy direction.

Investor confidence grew as US President-elect Donald Trump's economic team considered a gradual increase in import tariffs. This optimism bolstered risk-sensitive currencies like the AUD and contributed to the appreciation of the AUD/JPY pair.

Traders assessed data revealing a second consecutive monthly decline in consumer confidence, likely driven by the Australian Dollar's depreciation against the US Dollar. In January 2025, Australia’s Westpac Consumer Confidence Index dropped by 0.7% to 92.1 points, reflecting ongoing consumer pessimism.

The decline in consumer confidence sparked concerns about the outlook for interest rates and Australia’s broader economic health. Markets are now pricing in a 67% likelihood that the Reserve Bank of Australia will lower its 4.35% cash rate by 25 basis points in February, with a full rate cut expected by April.

Australian Dollar gains ground as US Dollar depreciates following PPI data

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• The US Dollar Index (DXY), which measures the US Dollar’s performance against six major currencies, trades near 109.20. The Greenback faced challenges following the disappointing US December Producer Price Index (PPI) data. Market participants will keep an eye on the US Consumer Price Index (CPI) inflation data, which is due later on Wednesday.

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• US Producer Price Index for final demand rose 0.2% MoM in December after an unrevised 0.4% advance in November, softer than the 0.3% expected. The PPI climbed 3.3% YoY in December, the most since February 2023, after increasing 3.0% in November. This reading came in below the consensus of 3.4%.

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• US Nonfarm Payrolls (NFP) increased by 256K in December, significantly exceeding market expectations of 160K and surpassing the revised November figure of 212K (previously reported as 227K).

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• Federal Reserve Board of Governors member Michelle Bowman added her voice to a chorus of Fed speakers last week as policymakers work double-duty to try and smooth over market reactions to a much tighter pace of rate cuts in 2025 than many market participants had previously anticipated.

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• Kansas Fed President Jeffrey Schmid made headlines on Thursday, stating that most of the Federal Reserve's mandated targets have recently been achieved. Schmid emphasized the need to reduce the Fed's balance sheet, suggesting that interest rate policy is approaching its long-term equilibrium. He noted that any future rate cuts should be gradual and guided by economic data.

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• On Monday, the China Foreign Exchange Committee (CFXC) pledged to support the Chinese Yuan during a meeting in Beijing on Monday, held under the guidance of the People’s Bank of China (PBOC). Separately, the PBOC and the State Administration of Foreign Exchange (SAFE), China’s FX regulator, announced an increase in the macro-prudential adjustment parameter for cross-border financing from 1.5 to 1.75, effective January 13, 2025.

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• People's Bank of China (PBOC) Governor Pan Gongsheng stated on Monday that "interest rate and reserve requirement ratio (RRR) tools will be utilized to maintain ample liquidity." Gongsheng reaffirmed China's plans to increase the fiscal deficit and emphasized that China will continue to be a driving force for the global economy.

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Australian Dollar remains below 0.6200, descending channel’s upper boundary

The AUD/USD pair trades around 0.6190 on Wednesday, maintaining its bearish outlook as it remains within a descending channel on the daily chart. The 14-day Relative Strength Index (RSI) remains above the 30 level, indicating a recovery from oversold conditions.

The AUD/USD pair faces immediate resistance at the nine-day Exponential Moving Average (EMA) at 0.6193, followed by the 14-day EMA at 0.6207. A more significant resistance level lies near the upper boundary of the descending channel, around 0.6220.

Regarding its support, the AUD/USD pair may test the lower boundary of the descending channel, close to the 0.5940 level.

AUD/USD: Daily Chart